Tax changes affecting homes to be modest

Nation's Housing

Homeowners can rest easy about Congress

CONGRESS MAY not be certain yet about what size and shape the 1999 federal tax-cut bill will take. But the outlook for tax changes affecting homeowners finally appeared clearer last week.

The best news for homeowners on taxes is that Congress plans only modest tinkering with the generous money-saving provisions granted homeowners in 1997 -- and one of the tinkerings liberalizes the law.

The sobering news is that a handful of proposals that would help certain categories of homeowners -- particularly older home sellers facing the "surviving spouse" tax trap -- now appear unlikely to be included in this year's major tax legislation.

Here's a quick home real estate update from the tax bill battle lines on Capitol Hill:

Whatever size tax cut the Senate and House ultimately agree on this year, it's likely to include two changes to the home-sale capital gains rules first enacted in 1997. Those rules eliminated a federal tax bite for the vast majority of home sellers, allowing qualified sellers who file a single return to keep up to $250,000 of their sale profits tax-free, and those couples who file jointly to keep up to $500,000 tax free.

Democratic Rep. Jennifer Dunn of Washington, a House Ways and Means Committee member, spotted a gaping loophole in the rules, however, and persuaded her colleagues to close it. Dunn's amendment would place new limits on taxpayers' ability to combine the generous home-sale capital gains exclusion with tax-free real estate exchanges. Under current law, an investor who acquires a rental house or condo as part of a tax-free exchange can rent the property out for a period of time, then move into it and treat it as a personal residence.

After two years, the taxpayer can then sell the house and keep as much as $500,000 of the profits tax-free -- even if most of the gain was produced while the property was a rental home. In tax terms, this is double-dipping to the max.

Dunn's reform would deny the $250,000/$500,000 capital gains exclusion to houses acquired through exchanges that were then subsequently sold less than five years after the acquisition. This would discourage investors from converting profits that would otherwise be subject to capital-gains taxes.

The House Ways and Means Committee's tax bill liberalizes one key feature of the current home-sale capital-gains rules: It relaxes time-limit calculations for members of the military, Foreign Service and other government agency personnel on overseas assignments, plus private industry employees sent overseas by their companies.

Under current tax rules, the $250,000/$500,000 capital-gains exclusions are limited to taxpayers who've owned their homes and used them as "principal residences" for two out of the prior five years. That requirement has proved problematical for members of the armed forces and other government and private personnel working overseas who haven't been in a residence for the required minimum two years during a five-year span.

Under the new rule now expected to be part of any 1999 congressional tax bill, employees transferred overseas by the government or private companies would have the period of their absence "suspended" from the five-year calculation. For example, say you and your spouse owned a home for years, but then were transferred overseas for four years. Under current law, you'd have only one year of qualified residential use during the five-year period, and you couldn't take full advantage of the $500,000 exclusion.

But under the new rule, the four years overseas would be suspended -- put on ice for tax purposes -- allowing you to reach back further to come up with the necessary two years of residence.

Not all the housing-related reforms advocated in the House and Senate earlier this year appear likely to get into the final tax bill. For example, a popular proposal to help "surviving spouses" take advantage of the full $500,000 ceiling for tax-free home-sale gains never made it into the House Ways and Means Committee's final bill.

Pushed by Republican Rep. Marge Roukema of New Jersey and supported by heavyweight lobbying groups such as the American Association of Retired Persons (AARP), the proposal would eliminate the requirement under current law that a "surviving spouse" sell the family home within the tax year of the death of her or his spouse to qualify for the married jointly filing upper limit of $500,000 on tax-free gains. She argued that many surviving spouses choose not to sell during the first year, and then discover that they have limited themselves to the single-filing status of $250,000.

In the words of one veteran Capitol Hill legislative expert: "Some of these ideas are just going to have to wait for another Congress."